John Locke Update / Research Newsletter

The Regulatory State and the Rule of Law, Continued

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Two weeks ago I linked to a post by John Cochrane in which he warns that:

The burgeoning regulatory state poses a new threat to our political freedom….

We’re headed for an economic system in which many industries have a handful of large, cartelized businesses — think 6 big banks, 5 big health insurance companies, 4 big energy companies, and so on. Sure, they are protected from competition. But the price of protection is that the businesses support the regulator and administration politically, and [do] their bidding.

A recent book review by John Goodman provides a vivid illustration of exactly what Cochrane is talking about:

In America’s Bitter Pill: Money, Politics, Backroom Deals and the Fight to Fix Our Broken Health Care System, [Stephen] Brill describes secret meetings, cynical emails and hidden contributions to political action funds….

Key players met behind closed doors in what years ago would have been smoked filled rooms. Everyone knew if you weren’t at the table you were going to be on the menu.

Max Baucus, the powerful head of the Senate Finance Committee came prepared to deal. His staff carefully estimated how much health reform would be worth to each of the major constituencies and for each of them he was prepared to ask for significant concessions in return.

Goodman summarizes numerous instances of cronyism described by Brill, beginning with the negotiation between Baucus and "big pharma":

The pharmaceutical industry, for example, would reap a $200 billion windfall over the first ten years of what would eventually become the Affordable Care Act. In return, Baucus wanted $130 billion back in the form of lower drug prices under Medicare and Medicaid and a tax on drug company revenues. If the Finance Chairman didn’t get his way, there were threats on the table: Medicare could start negotiating drug company prices the way governments in other countries do, we could make it easier for Americans to buy drugs from pharmacies in Canada and comparative effectiveness research might discover that a lot of drugs simply aren’t worth what they cost.

Billy Tauzin, the capable head of PhRMA also came ready to deal: $80 billion in concessions was his bottom line and he wasn’t going to budge. Ultimately, Tauzin prevailed, and Brill explains why. To have any chance of legislative success, the Democrats needed 60 senate votes. Without PhRMA, Tauzin knew they would never get to 60.

The drug companies did throw in a sweetener, however. They put up $70 million to fund an advertising campaign to sell ObamaCare to the public. Although a number of liberal groups were nominally cosponsors of those TV ads, it was (ironically) the pharmaceutical industry that sold health reform to the general public.

What was true of Big PhRMA was true of other industry groups with the political power to derail the entire effort. Health Care special interests as a whole spend four times as much as the military industrial complex on lobbying and campaign contributions, writes Brill.

Goodman goes on to summarize other instances of cronyism described by Brill, including the deals made by the hospital and the insurance industries, and supplements Brills account with some additional instances of cronyism of his own:

If there is a disappointment in Brill’s narrative, it concerns the role of big business and big labor. He notes the special tax on self-insured plans, but fails to say what these interests got in return. What they got was huge: health reform basically leaves them alone….

In return for selling out the seniors by agreeing to huge cuts in Medicare, AARP could expect a large flow of people from Medicare Advantage plans into the market for Medigap insurance. AARP makes more money selling Medigap insurance than it makes on member dues….

In return for selling out the doctors (and not insisting on a fix to the persistent problem of Medicare cuts in doctor fees) the AMA got to keep its monopoly on medical billing codes. The AMA earns more money selling rights to the billing codes than it collects in member dues.

There were deals with the National Association for Independent Businesses (NFIB) that essentially threw America’s largest job creation sector under the bus.

The Health Underwriters (insurance brokers) made a deal that its own members would soon regret.

Goodman ends by noting that ObamaCare was a missed opportunity:

White House health policy advisor Zeke Emanuel favored the McCain approach and White House economic advisor Jason Furman wrote a whole paper endorsing it while he was at the Brookings Institution.

Here’s why this is important. Although ObamaCare was supposed to be about health reform, right now there are only about 8 to 10 million Americans who have good economic incentives on the buyer side. In the ObamaCare exchanges, people get a fixed-sum subsidy that does not increase if they buy more expensive insurance. By contrast, everyone else in the country faces incentives that are just as perverse as they were before reform — if not worse. The 149 million Americans who get health insurance at work, for example, can all lower their taxes by buying more expensive insurance. And when they over-insure, they will also over-consume health care — whether it’s valuable or not.

Brill notes that Democratic Senator Ron Wyden at one point threatened to introduce a variation of the McCain approach right in the middle of the ObamaCare negotiations. But he completely misses why that would have been so disruptive. Republicans would have had a hard time voting against the McCain approach. And with Wyden’s sponsorship, it might have attracted Democratic votes as well.

Think about that. Instead of a completely partisan, special-interest-driven health reform, we might have had a bipartisan bill that really reformed the entire health care system.

Goodman seems to think this might actually have happened, but I suspect Cochrane would say that that sort of disinterested policy-making is no longer possible in the modern regulatory state.

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Jon Guze is Director of Legal Studies at the John Locke Foundation. Before joining the John Locke Foundation, Jon practiced law in Durham, North Carolina for over 20 years. He received a J.D., with honors, from Duke Law School in… ...

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